Banks move to pay savers more

The markets are forcing the hands of bankers in a way that is good news for savers, but bad news for borrowers.
Private commercial banks have recently increased the interest rate on deposits by 1 percentage point to 9.5 percent, in a bid to retain the money now flowing to the capital market, and to strengthen their capital bases for loans to new power projects.
The move may push borrowing costs up, which could hamper the country's industrialisation. “Savers, particularly small ones, are taking their money away from the banks to invest in stocks for quick returns,” said Ehsanul Haque, managing director and chief executive officer of Prime Bank.
“It's a blow to the borrowers who will have to pay more now for a rise in banks' cost of funds,” said Anis A Khan, managing director and chief executive officer of Mutual Trust Bank.
In August last year these banks slashed the rate paid to savers, and capped it at 8.5 percent, aiming to reduce borrowers "cost of funds". But the banks could not maintain the rate due to changing market trends.
Helal Ahmed Chowdhury, managing director of Pubali Bank, said his bank is offering a 9 percent interest rate to retain individuals' savings deposits, which are now flowing into the capital market.
Khan also admitted personal savings are chasing higher returns in capital markets, which entail much higher risks. Capital markets are increasingly drawing away the balances of small and medium savers.
“I have switched to the capital markets a year ago,” said Shahinur Alam, an executive in a trading company at Motijheel. “I got a return of nearly 50 percent, far higher than the banks.”
Investors in stocks expect higher returns than they get from banks. Their numbers, measured as beneficiary owners (BO) accounts, crossed 25 lakhs in June this year, up from around 15 lakhs a year ago.
Banks' clients have long been demanding a slash in the lending rates, as they believe borrowing costs in Bangladesh are among the highest in the world. Manufacturers have to pay 11 to 14 percent for bank loans, while consumer loans cost 15 to 18 percent.
In an unprecedented move, the top five industrialists in the country recently pressured the banks to lend them at single-digit interest rates, to offset their business losses for the acute energy crisis.
On the other hand, banks were facing a significant decline in investment demand due to the global recession and its impact on the economy in 2008 and 2009. To sustain businesses, banks invested heavily in the capital markets. The central bank later capped at 10 percent of their liabilities.
Besides funds flowing to the capital markets, bankers also see a rise in demand for money. “Demand for money has gone up, and too many banks and non-banks are in a competition to attract deposits and retain existing savers,” said Anis A Khan.
Khan also said banks need more money because of their expanding networks and lines of business. Mutual Trust Bank has expanded its branch network to 49 this year from 36 branches last year.
But Haque says banks are speculating on rising demand in business loans from the power sector: “Many power projects are coming into the surface. Although these projects need huge investments, bankers feel safe to fund them.”
In April, 2009, private commercial banks set the deposit rate ceiling at 9.5 percent, up from 13 percent, following Bangladesh Bank's order to reduce a lending rate then at an average of 14.5 percent. In August, 2009 they capped deposit rates at 8.5 percent.

sajjad@thedailystar.net